The Bank of England is seeking to further clamp down on the UK’s buy-to-let market.
It has published a Consultation Paper (CP 11/16) over its expectations of minimum standards that firms should meet when underwriting buy-to-let mortgage contracts.
The central bank says its proposals seek to ensure that firms conduct their buy-to-let business in a prudent manner. They aim to prevent a marked loosening in buy-to-let underwriting standards and to curtail inappropriate lending and the potential for excessive credit losses.
The Bank’s Prudential Regulatory Authority (PRA) is proposing that all firms use an affordability test when assessing a buy-to-let mortgage contract in the form of either an interest coverage ratio (ICR) test, and/or an income affordability test, where firms take account of the borrower’s personal income, to support the mortgage payment.
The PRA proposes that, when assessing affordability in respect of a potential buy-to-let borrower, firms should take account of likely future interest rate increases. In particular, the PRA proposes that the firm should consider the likely future interest rates over a minimum period of five years from the expected start of the term of the buy-to-let mortgage contract, unless the interest rate is fixed for a period of five years or more from that time, or for the duration of the buy-to-let mortgage contract if less than five years.
In coming to a view of likely future interest rates, the PRA would expect firms to have regard to market expectations; a minimum increase of 2 percentage points in buy-to-let mortgage interest rates; and any prevailing Financial Policy Committee (FPC) recommendation and/or direction on the appropriate interest rate stress tests for buy-to-let lending.
Even if the interest rate determined above indicates that the borrower’s interest rate will be less than 5.5% during the first five years of the buy-to-let mortgage contract, the firm should assume a minimum borrower interest rate of 5.5%, the PRA said.
The Bank said that the outstanding stock of buy-to-let mortgages has risen by 11.5% in the year to 2015 Q4. The macroprudential risks centre on the possibility that buy-to-let investors could behave pro-cyclically, amplifying cycles in the housing market, as well as affecting the resilience of the banking system and its capacity to sustain lending to the wider real economy in a stress, it added.
